Ginn v. MNR, 92 DTC 2233, [1992] 2 CTC 2579 (TCC)

Bell, T.C.C.J.:— The appellant appeals from the reassessment by the respondent of his 1985 taxation year wherein the respondent allowed him a net capital loss of $24,184.87. The appellant, in respect of the matters giving rise to such net capital loss, seeks to deduct the sum of 158,356.77 (made up as described herein) as a non-capital loss in that year.

The appellant is a public accountant who performed accounting services and prepared income tax returns for clients and acted as a financial consultant including on tax savings. In particular, he represented the Deslauriers family whose members were Mr. and Mrs. Albert Deslauriers, two sons and a stepson, all of whom operated a meat store. He did their banking, assisted with financing at the bank, did their payrolls, paid all bills, opened some mail and signed their cheques all pursuant to a power of attorney for those purposes. He prepared a synoptic each month, prepared a profit and loss statement each month, prepared their personal income tax returns and generally advised them on business and tax matters. All of such services constituted the appellants “accounting business”.

In 1981, the appellant advised the Deslauriers that they had a tax problem and should consider purchasing some Multiple Unit Residential Buildings (MURB's). Because the MURB's that they considered purchasing in Vancouver were very expensive the appellant advised them that he and his wife owned units in Ontario, that 30 or 40 of his clients owned units there that cost under $50,000 per unit and that if each member of the family working in the meat business purchased a unit, substantial income would be sheltered. As a result, each of the five family members decided to purchase a unit. The appellant arranged the purchase of five units through his brother in Ontario, took the Deslauriers to the bank where each family member borrowed $10,000 to assist in the down payment, took the money to Ontario to a lawyer who prepared conveyances and took same back to the Deslauriers for execution.

The Deslauriers ceased to make mortgage payments after one year and returned the rental cheques to the management company. This resulted in foreclosure proceedings being commenced against them in respect of the units.

The Deslauriers family then commenced action against the appellant and his wife, two of his brothers and other persons, including corporations, mostly related to the appellant. This legal action, in the Supreme Court of British Columbia, alleged that the appellant had made a number of false representations and had fraudulently failed to disclose the true facts concerning the circumstances of the sale to the Deslauriers of five condominiums in Port Dover, Ontario. Mr. Justice Wallace of that Court, in his reasons for judgment in 1985 said, inter alia,

. . .I cannot find Mr. Jack Ginn to be a credible witness. Rather I find he fraudulently induced the Deslauriers to investtheir moneys in condominiums in which he, his wife, his brothers Lome and Arthur, and his brothers’ associates, had an interest. The object of the scheme in which they all participated was to transfer the condominiums to the unsuspecting Deslauriers, thereby realizing a substantial profit to themselves as the vendors. In furthering this fraudulent scheme Mr. Jack Ginn acted as the agent and financial advisor of the Deslauriers. He was anything but an honest agent. He failed to disclose to the Deslauriers that he and his wife owned units 10 and 12, two of the five condominiums the plaintiffs were purchasing. Instead he told them that he and his wife were owners of two condominiums and were very content with their investment. There was no suggestion that they considered selling them at the time he was recommending that the Deslauriers invest in the condominiums.

He also failed to disclose that second mortgages had been placed on units 2 and 4 in favour of his brother Lome's investment company, Callana Investments, and subsequently to himself or that third mortgages had been placed on the two units in favour of himself.

His explanation for not disclosing his ownership of units 10 and 12 was that he thought he had sold them in June of 1981 to, or through, his brother Lome. Of course this does not explain why he would tell the Deslauriers in July, 1981 that the condominiums he and his wife owned were doing well for them. Nor is it consistent with his admission that he continued to pay the first mortgage payments on these units from June to August, 1981 and he continued to receive rentals for them from Wendy Ginn Management for those months.

The reasons for judgment describe further details of the fraudulent transaction and result in a determination that the contracts of purchase by the Deslauriers were void ab initio and that the plaintiffs were entitled to be put back into the position they would have been in had they not entered into the contracts to purchase the condominiums.

The learned justice then ordered that certain defendants, including the appellant, pay to the plaintiffs the principal sum of $80,086.68, prejudgment interest in an amount subsequently determined to be $45,127.87 and costs of the action subsequently determined to be $34,132.22. Although the total of these three figures is $159,346.77, the appellant relied upon the other sum of $158,356.77 aforesaid and the respondent raised no issue in this regard.

The respondent calculated the aforesaid allowable capital loss of $24,184.87 as follows:

The appellant did not dispute the method of this computation but stated that:

. . .this is not a capital transaction. The original sale was treated in 1981 as a capital transaction, and correctly so, and the amount remains assessed and unadjusted correctly. However, the amounts in dispute here don't relate to capital items which would not be allowed as a deduction from income.

In argument, the appellants representative said, with respect to the sum of $158,356.77,

It was deductible in 1985 on the basis that the amount was established at that time. There was legal liability to pay that amount. That the amount arose as a result of matters that were incidental to the practice of the taxpayer's profession, and that in accordance with section 9 of the Income Tax Act, R.S.C. 1952, c. 148 (am. S.C. 1970-71-72, c. 63) (the "Act") that they should be allowed as a deduction in arriving at profit which is income.

However, I find that the lawsuit instituted by the Deslauriers did not arise out of a transaction in the conduct of the appellant’s accounting business and was not incidental thereto. Rather, it arose out of and by virtue of the appellant's conduct in respect of the 1981 sale of condominiums, two of which had been owned by the appellant and his wife and which the appellant himself characterized as capital in nature. Accordingly, the appellant is not entitled to the deduction sought for his 1985 taxation year and his appeal is dismissed.

Appeal dismissed.